Derivatives are investments whose values derive from the security which they are based on. Options can be useful in making a portfolio less risky. Derivatives can also be futures contracts or swap agreements.
Stock options are a contract that allows one to sell or buy 100 shares of stock at a given price and in a specific time frame. These can be traded on numerous exchanges.
When an option is bought, an investor will buy a premium, which is the commission plus the price of the option. If an investor is to buy a “call” option, they are predicting that the price of the security will increase before the option period expires; on the other hand, if the investor buys a “put” option, then they are predicting that the price will decrease.
This can be a useful tool in an investment portfolio, but not recommended for beginners, if you are interested in trading options, be sure to do your homework.
Posted in: Developing a Financial Plan